The new EU Investment Firms Regulation and Investment Firms Directive have been published in the Official Journal of the European Union. The new legislation aims to create a more tailored regulatory regime for many EU investment firms that reflects the risks inherent in the diverse activities those firms undertake. It also aims to amend the prudential requirements imposed on certain investment firms to avoid the imposition of undue administrative burdens by removing them from the scope of the revised Capital Requirements Regulation and Capital Requirements Directive. “Investment firms”, for the purposes of the Regulation and Directive, are as defined under the revised Markets in Financial Instruments Directive. However, national regulators may exempt investment firms from the majority of the provisions on an individual basis if they meet certain conditions, including that they qualify as “small and non-interconnected” firms as defined under the Regulation, and are subsidiaries of institutions regulated on a consolidated basis under either CRR II or the Regulation. “Systemic” investment firms will remain subject to the CRR II and CRD IV regimes. For the purposes of the Regulation and Directive, these are firms that deal on own account or underwrite financial instruments and/or place financial instruments on a firm commitment basis and have a total value of consolidated assets equal to or greater than €30 billion. Commodity and emission allowance dealers, collective investment undertakings and insurance undertakings are excluded from the definition of systemic firms.

Key provisions under the Regulation include:

• Own funds requirements, requiring small and non-interconnected firms to hold own funds equal to the higher of their permanent minimum capital requirement (as set under the Directive) or a quarter of their fixed overheads for the preceding year; in the case of all other investment firms subject to the Regulation, this should be the higher of the latter two measures or the sum of their requirement under the “K-factors”;
• K-factors, which capture a series of risk factors in the calculation of own funds requirements by imposing coefficients on the own funds calculations with respect to the risks to clients, markets and firms of the particular investment firm’s activities;
• Liquidity requirements, requiring firms to hold at least one third of their fixed overheads requirement in liquid assets (although national regulators may choose to exempt small and non-interconnected firms from this requirement); and
• Disclosures and reporting on matters such as level and composition of own funds, liquidity requirements and adherence to concentration risk provisions.

The Regulation will enter into force on December 25, 2019. The majority of the provisions will apply from June 26, 2021, with the exception of: (i) certain amendments the Regulation makes to the provisions governing tick sizes under the Markets in Financial Instruments Regulation, which will apply from March 26, 2020; and (ii) certain amendments the Regulation makes to the market risk reporting requirements under the revised Capital Requirements Regulation, which will apply from December 25, 2019.

Key provisions under the Directive include:

• Minimum initial capital requirements, ranging from €75,000 to €750,000, depending on the activities undertaken by the investment firm in question;
• Duties upon national regulators to cooperate with national regulators of other Member States and to comply with professional secrecy obligations, together with powers to investigate and impose sanctions upon investment firms that fail to comply with the Regulation and Directive; and                                               
• Requirements that investment firms have acceptable governance arrangements, risk management procedures and remuneration policies.

The Directive will enter into force on December 25, 2019. The majority of the provisions must be transposed into national laws and applied by EU Member States by June 26, 2021, with the exception of the amendment to the revised Markets in Financial Instruments Directive requiring national regulators to cooperate with the European Securities and Markets Authority to ensure that the activities of an investment group within the EU are subject to effective supervision in accordance with relevant EU legislation (including the Investment Firm Directive, Capital Requirements Regulation and MiFIR). Measures to ensure compliance with this amendment should be introduced by Member States by March 26, 2020.

View the Investment Firms Regulation.

View the Investment Firms Directive.

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